FX.co ★ Preview of US-China relations: new sanctions rumors alarmed the markets

The AUD/USD currency pair returned to the previous price range, wherein it was traded almost the whole month of January. It tried to break through the level of 0.7800 for several weeks, but went to the range of 0.7010-0.7080 after failing a lot of times. Nevertheless, the 78th figure remains in the range. Once this level is broken, buyers of AUD/USD can move to the next price level, where the main pivot point will be the level of 0.80.

However, it is too early to talk about such price peaks, since the bulls need to break through the 0.7800 mark first. After that, we can talk about the next (main) resistance level of 0.7900 (upper line of the Bollinger Bands indicator on the daily chart). At the moment, the pair remains in a flat after returning to the area of the level of 0.77. During today's Asian session, the Australian dollar traded in a narrow 25-point range, showing total weakness.

The Asian session was held in the same way for the other currency pairs of the major group. After a fairly strong decline in the previous days, the US dollar is waiting for information drivers. The US dollar index hinted at corrective growth, but the indicator turned back down by the start of the European session. However, all these fluctuations in the index did not affect the dynamics of the AUD/USD pair (as well as on the dynamics of other dollar pairs) in any way. Most likely, the last trading day of the week will be the same for the Australian dollar. Today, any Australian macroeconomic reports will not be released. As for the United States, there will be publication of minor statistics, while the Chinese are celebrating the New Year. Therefore, AUD/USD traders pair will follow the sentiment of dollar bulls, which in turn, will react to the dynamics of the stock market, the yield of treasuries and the level of anti-risk sentiment.

On Thursday, the US stock market increased – the key indices S&P 500, Nasdaq Composite and Dow Jones Industrial Average closed in the positive zone. The reason lies in investors' optimism regarding the adoption of an almost 2 trillion dollar aid package for the US economy. Yesterday, the Speaker of the House of Representatives, Nancy Pelosi, said that the bill will most likely be passed before the end of this month, that is, within the next two weeks. But after the Democrats were able to approve the budget resolution in Congress, the probability of passing the above-mentioned bill increased as much as possible. Unless, the actions of Democratic senators interfere with this process, which is unlikely.

Despite the fact that the major indices ended yesterday's trading in the positive zone, the US stock market rose averagely compared to previous days. Apparently, investors were alarmed by the statements of the US President, Joe Biden, with regards to the prospects for US-China relations. It became known that Washington plans to introduce additional restrictions on the export of dual-use technologies to China. It should be noted that this is not official information: Reuters reported it with reference to a representative of the presidential administration. Earlier, Biden promised not to get involved in trade wars with China, as his predecessor Donald Trump did. Therefore, the reaction of the market to the news from Reuters was limited. Also, according to official information, leaders of the United States and China held a telephone conversation this week – Biden raised the issue of human rights in China, trade relations and international security field relations. It should be recalled that Trump has not spoken with Xi Jinping since the spring of last year, after the United States was at the epicenter of the coronavirus pandemic.

Thus, US-China relations have come to the forefront of the information flow once again. So far, Joe Biden has avoided harsh language against China (especially when compared with Trump's statements about Beijing), but at the same time, he makes it clear that he will not become an enemy of his predecessor on the Chinese issue. This fact allowed the dollar bulls to stop the decline of the US dollar all over the market. In addition, the end of the week also plays a role: many traders take profits amid the correction of the US dollar index.

From the point of view of technical analysis, the AUD/USD pair will most likely increase in the medium term. For the Australian side, positive factors include RBA's wait-and-see position, growth of key macro indicators, and the growth of the commodity market (in particular, iron ore), and a relatively good COVID-19 situation in the country. On the other hand, the US currency cannot show such achievements due to failed Nonfarm, indistinct growth of US inflation and the Fed's "dovish" rhetoric.

But as soon as traders' concern about the prospects for the development of US-China relations subsides, which is expected to happen next week, if the White House does not really impose additional sanctions, then AUD/USD buyers will continue to grow. The first upward target is the level of 0.7800 (upper line of the Bollinger Bands indicator on the daily chart). It's too early to talk about higher levels, since it will be hard for the pair to break through this target.